The GERM Report

-Russia frets about the possibility of life at $25 per barrel

-US troubles overshadow risk elsewhere.  

Crude oil prices were brushing off the irrational exuberance caused by dip-buying and an upward revision to market direction from the US Energy Information Administration. The bullish momentum in Wednesday trading was supported further by a massive draw on US gasoline stockpiles, though data may still be skewed by the impacts of Hurricane Laura in late August. Pressure from the supply side, in the form of OPEC+ barrels, continues and majors are looking offshore to store any surplus. Not to be ignored, a blast Thursday at the port in Beirut is a reminder that tensions are running hot in the region. Instability, whether in the form of market volatility or political volatility, is always destabilizing.

Crude oil prices were in a Pamplona mood in Wednesday trading, giving Brent enough ammo to support a $40 per barrel floor. Traders will be focused on US employment figures as a sign of momentum, though a spike in cases of coronavirus from the re-opening of schools and universities could indicate a modest increase in hiring is over. Brent was trading down about 1% to $40.37 per barrel as of 8 a.m. ET.

Analysts at the EIA played both sides of the coin in their latest monthly report. The administration raised its forecast for Brent by around 1% from its August estimate to $44 per barrel for the fourth quarter, triggering some optimism in the market. That said, analysts there also warned that inventory levels would remain high and limit any upward pressure on crude oil prices. Last month, a survey of economists from the Reuters news service showed only a modest uptick for oil was expected by next year. Brent crude oil, according to the survey, is expected to average $42.75 per barrel this year, up from the July estimate of $41.50 and against a $43-ish per barrel average so far this year. Meanwhile, the American Petroleum Institute reported a 3 million barrel build in commercial crude oil inventories, but a near 7 million barrel draw on gasoline stockpiles. That suggests consumer demand improved, though data are still skewed by the impact Hurricane Laura had on refineries on the US Gulf Coast.

The big-ticket items for the morning were decisions from the European Central Bank, which said it would keep its rates at near-zero, and weekly filings for unemployment insurance from the United States. New claims came in at 884,000, more than expected, and continuing claims remained stubbornly high. Hiring has improved in some segments of the economy, though the economy has yet to recover all the jobs lost to the pandemic. School campuses, meanwhile, are dealing (or not dealing very well) with outbreaks of the coronavirus and, with the seasons changing, life at outdoor restaurants and other seasonal economic segments could grind to a halt.

While the United States remains the largest economy in the world, it’s not the only game in town. Market watchers have been looking at bloated offshore storage in China as an indication that demand in the world’s second largest economy was slowing down. Russia’s Central Bank, meanwhile, said it was wary of further damage to the economy from the pandemic. Looking at a steady wave of infections, trade tensions and geopolitical risk, the bank could not rule out a return to $25 per barrel. The low price of oil suggests it may be better to keep barrels in storage on hopes for a brighter future. Big trading houses like Trafigura are booking storage offshore, and even BP is getting in on the game. The weak sentiment was growing contagious.

“Crude oil remains under pressure from weaker fundamentals as the global energy demand recovery shows sign of stalling,” Ole Hanson, the head of commodity strategy and Danish investment firm Saxo Bank said in a morning note. “Many countries around the world, especially in Europe and Asia, are now in the midst of a second coronavirus wave.”

The viral pandemic, along with the social and political unrest in the United States, are stealing the headlines. The lack of diversity, however, is dangerous ignorance. On Thursday, a huge blaze erupted from the rubble at the port of Beirut, barely a month after what was likely the largest non-nuclear blast in history left some 200 people dead. To describe the situation in Lebanon as tense would be an understatement, with the mood more or less consistent with that in the United States after al-Qaida struck New York City, Washington DC and Pennsylvania in 2001. Those tensions have regional repercussions, and a US-led containment effort against Iran only makes matter worse. Iran, whose ally Hezbollah has a political foothold in Lebanon, is trying to flex its muscles, looking at incidents in and around the Persian Gulf last year as indicative of its ability to stir the waters. The Iranian military said it was warning US drones to stay away from maneuvers in the Gulf of Oman, where Tehran has newfound maritime interests to avoid the Strait of Hormuz. That should serve as a reminder of the potential for conflict, as the United States and Iran teetered on the brink of war after the downing of a US drone last year.